Gold, and to a lesser extent silver, is the traditional hedge against fiat currency debasement. Debasement is the essential policy (both by design and by necessity) of pretty much every central bank in the world. The hard money advocates and gold analysts have been talking about this for decades, ever since President Nixon ended the last vestige of gold backing for the USD by unilaterally taking the country out of the Bretton Woods agreement in 1971, on the advice of Milton Friedman and future fed chairman Paul Volcker. (That this counsel was some of the most horrifically bad economic advice in history is amply demonstrated just by looking at the many charts available here.) Today’s gold analysts understand all this very clearly. Take for example this recent essay by the redoubtable Alasdair Macleod at GoldMoney, available here:
Crazy days for money
This article anticipates the end of the fiat currency regime and argues why its replacement can only be gold and…
Macleod, a fine writer, eloquently makes the case for why the fiat money system may soon be in crisis, and why desperate governments and central banks around the world will then be forced to adopt a gold backing (at least fractionally) in order to glue their shattered monetary regimes back together. Unfortunately, he then jumps the tracks completely by drawing the wrong conclusion: that, therefore, private investors should own gold.
Actually, the likelihood of fiat failure resulting in a reconstituted semi-gold standard means: one should not attempt to use gold for private wealth preservation. We shall now explain why.
First, note that the gold price is heavily managed (one could even say “manipulated” or “fixed”) by the very same financial cartel that controls the fiat system. This is done by various methods, but they all boil down to the same basic tactic: the paper supply of gold can be increased to absorb demand, even faster than the rate of currency dilution. And yes, the banking cartel has indeed been caught fixing gold prices — repeatedly. This is no longer a theory offered without convincing proof by zealots at GATA (who were long dismissed as crank conspiracy theorists!). It’s an established fact reflected in the tens of billions of dollars in fines paid by the guilty institutions in recent years. These banks simply pay the fines as a cost of doing business and do nothing to change their policies. As a result, gold is a broken hedge against fiat inflation, since its price simply will never be allowed to reflect the true state of affairs.
In a way, the divergence of the bitcoin (BTC) price and the gold price is by itself evidence of this. While Wall Street and public companies are becoming increasingly enamored of BTC (e.g. Tesla and Microstrategies), at this point only around 3% of all BTC is held by institutional investors. As a result, institutional ability to generate artificial “paper” supply to hurl against demand is extremely limited, unlike the metals markets where huge hoards can be rehypothecated hundreds of times over without the fraud being detectable. Moreover crypto markets typically settle trades in the particular token, and are not cash-settled derivatives like the vast majority of commodities trading (not only metals). The increasingly popular decentralized exchanges (DEXs) always deliver tokens to settle trades. Consequently a limited number of shorts, which keep getting overwhelmed as they try to defend $30k, then $40k, then $50k, are the only feeble roadblock anyone has managed to erect against BTC’s price thus far. These are more like hurdles than roadblocks, and BTC has been running hard.
The reason BTC (and the whole crypto space of hundreds of major tokens) has been running hard is because plenty of people can see the massive global money printing happening. They all understand it will end badly, and they see crypto as the place to go to hedge their bets. Crypto is now its own asset class, and BTC is becoming a tool not just for idiosyncratics who hate central banking, but also one that rich people can use to stay rich. Participation by the elites (e.g. Elon Musk, BlackRock) greatly decreases the likelihood of any kind of major regulatory roadblocks being erected.
The second reason to prefer cryptos over gold is the imminence of CBDCs, Central Bank Digital Currencies. Although only China’s PBC has done a trial deployment yet, practically every major central bank in the world has one of these in its incubator at one stage or another. So do international institutions like the IMF and BIS. Every regime is salivating for the control grid offered by a purely digital currency without physical cash in circulation. But in order for these to replace existing currencies, they will need legal tender status. (And probably, names similar to existing fiat currencies to avoid confusion, such as “edollars.”) Since they’ll be introduced against a hyperinflationary backdrop, they’ll also need to be backed by vaulted gold bullion.
Of course this will be a fractional backing, never some Rothbardian 100% reserve specie — otherwise sovereign governments would have to give up their money printing privileges forever. But surely the easiest way to get everyone to stop using their physical cash all at once and drag them into the new CBDC system would be to wait until the cash is hyperinflating to oblivion, and then introduce the new CBDC stablecoins, backed by precious metals. Stubbornly clinging to your cash becomes self-destructive in that scenario.
The OCC (Office of the Comptroller of the Currency), which regulates federally chartered US banks, has already given its blessing to using public blockchains from the private sector as payment settlement rails among banks. All they would need to do is clone or leverage the infrastructure for existing private USD-backed stablecoins like USDT, USDC, BUSD, and GUSD. This eliminates the objection that the central banks could never pull off an acceptable implementation of their new digital tokens. The private sector has already broken the ground.
The consequences of all this are predictable, so let’s predict a few:
- Countries will be competing with each other for gold backing percentage. Asian countries such as Russia and China have been quietly accumulating gold for decades now. (Mao launched this policy in China in the 1970s!) Western countries were net sellers until about 2000, and may not actually possess all the gold reserves they claim. (The US hasn’t audited its gold since 1951!)
- Thus once everyone’s hand is revealed, the US and its allies will presumably be in a weak position, even if all their claimed reserves are real. Those countries will therefore nationalize all the gold they can get their grubby little protuberances on directly. Patriotic duty will be invoked, the rich must give up their hoards for the public good, selfish hoarders must be ratted out and made example of, and so on. It won’t be pretty. Mewling complaints by rich old upper middle class Republican white folk (aka white supremacist domestic terrorists) about how they’re getting robbed here may be cause for gleeful laughter, but will inspire neither sympathy nor justice.
- Seizing investment bar gold will be easy: there are a small number of bonded and insured warehouses, and badged orcs with guns can trivially be sent to all of them. As with coronavirus lockdowns, this practice will spread around the world very quickly, so storing gold in another country will be of little use. Thanks to hyperinflation + FACTA, all foreign gold accounts held by US persons will be reported worldwide, probably well in advance.
- This time it’s probable that bullion coins, collectibles, and even jewelry, above say 12 carat, will get included in seizure orders. It was only bullion coins back in 1933, but today’s pols are much more enthusiastically unscrupulous tyrants than their predecessors 90 years ago. If they can tell you that you must wear a mask, they can tell you that you can’t wear gold jewelry. Insurance company databases will identify most people with significant holdings of coins or jewelry.
- It might be argued that, well at least you’ll get fair market value for your seized gold. Perhaps you will. But the sensible procedure would be for governments to conduct the seizure of gold first, before the currency revaluation to CBDCs occurs. (Just as in 1933-4.) That way the recompense can be paid in existing fiat dollars, euros, pounds, etc. So say your fair market value is as of the end of the month; but it will (naturally) take a few months to process your claim, so by the time you get paid it will amount to one cent on the dollar or whatever. Too bad, so sad. Or you can just hide your contraband. (About 3/4ths of the coins “seized” in 1933 were never turned in, which is where all those impressive populations of collectible coins from that period originate. But they had to stay in hiding for 40 years!)
- In sum, if state currencies are ever going to be backed by gold, then gold will become the most unsafe asset imaginable, because its holders will be in direct competition with other would-be owners, who have way more guns and neither the inclination nor any need to play fair.
By contrast, as Macleod notes, central banks do not have any BTC in their vaults. Nor are they likely to obtain enough in time. Nor could they seize any significant quantity. Cryptos are decentralized not only in their operation on globally distributed blockchains, but in their storage. A wallet is just a file. Files can be stored anywhere, replicated, backed up, hidden online or off. Easily moved across borders, unlike gold. Even when the wallet file is available, it’s usually encrypted. There are criminals who had their crypto seized and never gave up their keys, even in prison, and to this day the government cannot unlock their wallets. No passphrase, no value. A mass seizure of crypto assets is beyond futile, it’s simply unimaginable.
That’s why this time, when we get a currency reset, it will be cryptocurrencies that trade as a legal asset class alongside the CBDCs, not gold. After gold ceased to back the dollar, it was re-legalized for citizens to own in 1974. Since then gold has traded alongside the dollar, because gold is no threat to it. It follows that if gold ever again backs the dollar, gold must again be made illegal. Meanwhile there will be no reason to outlaw bitcoin. In fact, the establishment and its donor class will do their best to feather their own nests around the currency reset, plainly including climbing on the crypto bandwagon. Once that happens, attempting to make it illegal will be out of the question, never mind an iffy proposition to begin with. If you’re the government, you don’t bite the hand that owns you. Besides, there’s a distinct leveling vibe with crypto, in that no identity implies an absence of discrimination, a meme elucidated by the author of this report from the St. Louis Fed. (This is an excellent paper on DeFi well worth the read, and hardly demonstrative of hostility to developments in the nascent space.)
Meanwhile gold just experienced a bearish “death cross” yesterday, where the 50 and 200 day moving averages crossed over each other. This development suggests a price retracement back to the $1200 range, where gold drifted prior to 2019. And why not? If you’re the establishment, and you can see the writing on the wall as easily as Mr. Macleod does, why not read it as “mene, mene, tekel, drive the price down to shake loose all the gold we can so we don’t have to seize it later”? Yet Fed spokesdroid Bullard is telling us “$50,000 bitcoin is no threat to the dollar.” Of course it isn’t, because BTC will never be official money. Not to mention Mr. Bullard and his friends are probably buying BTC with both hands right now. As an insider’s hedge against fiat collapse, one suspects gold is out and crypto is in.
But gold probably will back the dollar and its peers someday. And that makes it a terribly risky investment, even if its price wasn’t controlled by the bad guys. This quote from Friedrich Hayek (author of The Denationalization of Money) about sums it up:
“I don’t believe we shall ever have a good money again before we take the thing out of the hands of government, that is, we can’t take it violently out of the hands of government, all we can do is by some sly roundabout way introduce something that they can’t stop.” (from a 1984 interview)
Ding ding. Nailed it.